Stop Order Liability Question

9

9torque

This is a specific question as to what party would liable for a failure to enact a stop order.


Here are two links that partly address this subject. I see that Don Bright is the author of the first one....perhaps he might instantly know the answers here.

http://www.traders.com/index.php/sa...cts-of-trading/805-stop-orders-a-conversation

http://www.trade2win.com/boards/direct-access/81922-sec-requirements-stop-orders.html


As we know, some exchanges accept stop orders and some do not. For example, ARCA no longer does. Yet NASDAQ does accept them. For variety of reasons not pertaining the question, I prefer using these exchanges.

When using any route, the stop order wherewithal is available, either through the platform vendor you happen to be using (such as DAS or Sterling) or by some other 3rd party mechanism, or by your broker (as with IB in the above example). However, with most if not all of these 3rd party stop systems, they understandably have disclaimers that basically state that if there is the unlikely glitch, or server failure,or anything of the sort, then the 3rd party vendor holding these stops are not liable for the failure of executing these stop orders. This is an unlikely occurrence, yet possible.


The succinct questions are these....

1) Since, for example, the NASDAQ OMX does accept stop orders as an exchange,...if one were to route a stop order to NASDAQ OMX to where that stop sits in their exchange servers, would the liability for the execution of that stop order lie with that exchange?...as opposed to the trader? Implicitly is there any advantage to this?

2) If the answer to 1) is 'yes', should not this be something that traders who use stop orders be aware of? Or is the risk of failure and worse case scenario so low that it is relatively inconsequential despite the vendor disclaimers?


I have scoured the SEC regs and the NASDAQ website to assess this, but cannot find it in any disclaimers or regulations.

I have consulted with numerous owners and risk managers of prop firms, and I cannot get an absolute answer to this. It would appear to me that it is 'answerable'.


Thanking you in advance for any answers here.
 
When you sign your account papers, you basically knowledge that trading is risky and you will not hold your broker responsible for losses from trading system malfunctions. In practice, you might get them to look back and give you a fair price when issues occur. You won't know until it happens.

The quick answer is that you're responsible.

1245
 
Thank you 1245,

I understand that aspect of the general responsibility and that which a trader/investor agrees to in any arrangement.

My question is more specific here. It is a legal question but one that an attorney need not be required to answer, only because that responsibility is delineated somewhere...either in exchange policy or in the bowels of SEC regulations of exchange responsibilities.


By putting the stop order directly into the exchange as opposed to the 3rd party vendor, will that shift the liability of stop order execution to the exchange and away from the trader?


Thank you again.
 
Quote from 9torque:

Thank you 1245,

I understand that aspect of the general responsibility and that which a trader/investor agrees to in any arrangement.

My question is more specific here. It is a legal question but one that an attorney need not be required to answer, only because that responsibility is delineated somewhere...either in exchange policy or in the bowels of SEC regulations of exchange responsibilities.


By putting the stop order directly into the exchange as opposed to the 3rd party vendor, will that shift the liability of stop order execution to the exchange and away from the trader?


Thank you again.
More...

Maybe this will help. Since the advent of electronic markets has rid the market of a specialist or reduced their responsibilities because they no longer get paid for a commission for each execution on their book, Stop and Stop limit orders are no longer executed by the exchange. They are held by the platform you're using until they need to be executed. So your broker either provides the platform or has some responsibility for getting it for you. The only place to look for a stop that fails to execute or executes improperly is your broker. If you use a third party platform like Sterling, they will have no liability. You will see a disclaimer as you log into your trading platform that "stuff" can happen and they are not responsible.

You can always take your broker to arbitration. You will have to show something happened that they could have prevented.

1245
 
1245, thank you again foryour reply.

You said.... "....The only place to look for a stop that fails to execute or executes improperly is your broker...."

OK.


I guess I have hit a wall here...because I have asked this specific question here to the broker and they will not answer. I'm reluctant to list who the broker is here...it's actually a prop firm).


But in your response, you do concur as I stated that the 3rd party vendors have disclaimers here. (I'm of the opinion this is partly why ARCA no longer accepts stop orders). NASDAQ still accepts them, as you probably know.

So even if the broker will be the 'go to' entity the trader can go to in the unlikely worse case scenario, I have to conclude that it is still potentially 'more risk averse' to place these stops in the exchange (NASDAQ OMX, in my case) rather than in the 3rd party vendor servers.

Would you generally concur with that?
 
Let me add to this....


It is my understanding that INET handles the NASDAQ stop orders. INET is part of the NASDAQ corporate entity. Therefore NASDAQ is the recipient of the stop order (thru INET) and not a 3rd party they contract with.

If this is in error, advise.


Thank you again for your help here.
 
Quote from 9torque:

1245, thank you again foryour reply.

You said.... "....The only place to look for a stop that fails to execute or executes improperly is your broker...."

OK.


I guess I have hit a wall here...because I have asked this specific question here to the broker and they will not answer. I'm reluctant to list who the broker is here...it's actually a prop firm).


But in your response, you do concur as I stated that the 3rd party vendors have disclaimers here. (I'm of the opinion this is partly why ARCA no longer accepts stop orders). NASDAQ still accepts them, as you probably know.

So even if the broker will be the 'go to' entity the trader can go to in the unlikely worse case scenario, I have to conclude that it is still potentially 'more risk averse' to place these stops in the exchange (NASDAQ OMX, in my case) rather than in the 3rd party vendor servers.

Would you generally concur with that?
More...

Yes, read this as an example from Sterling Trader which most prop firms use for equity trading: http://www.sterlingtrader.com/support/serverside_order_policy.html

That tells you not only that they do the stops through their server but also states their disclaimer.

And, No. I still believe that all stop orders are handled by the trading platform. I could be wrong.
 
Quote from 9torque:

1245, thank you again foryour reply.

You said.... "....The only place to look for a stop that fails to execute or executes improperly is your broker...."

OK.


I guess I have hit a wall here...because I have asked this specific question here to the broker and they will not answer. I'm reluctant to list who the broker is here...it's actually a prop firm).


But in your response, you do concur as I stated that the 3rd party vendors have disclaimers here. (I'm of the opinion this is partly why ARCA no longer accepts stop orders). NASDAQ still accepts them, as you probably know.

So even if the broker will be the 'go to' entity the trader can go to in the unlikely worse case scenario, I have to conclude that it is still potentially 'more risk averse' to place these stops in the exchange (NASDAQ OMX, in my case) rather than in the 3rd party vendor servers.

Would you generally concur with that?
More...
"I guess I have hit a wall here...because I have asked this specific question here to the broker and they will not answer. I'm reluctant to list who the broker is here...it's actually a prop firm).'

i guess you are scared that they are going to shoot you and your shadow,

unreal.
 
zdreg,


"...i guess you are scared that they are going to shoot you and your shadow...."



Not really.

The prop firm is the one to which to ask these questions. As mentioned here in the thread, I've done that and they can't answer them. Other prop firm owners and risk managers that I know can't answer them either. I actually find that stunning.

This week I am going to attempt to ask these questions to NASDAQ, but this is like making a call to the federal government. Finding somebody there who can give an objective answer will be probably difficult.

It's only chasing shadows if all stop management is handled by the broker or the would be 3rd party platform.

If I am able to get them answered from NASDAQ, I will post this here in this venue to whom it may concern.

Depending on the answer, it may be of value to certain traders depending on their use of stop orders.

And while I attempt to do this, I am going to also post this question in the 'Prop Firm' forum. While this is an 'Order Execution' question, it is also a 'Prop Firm' question.


If any liability here can be partly or totally transferred to the exchange, it could be worth any premium in ECN fees to a trader...again, depending on how one trades.
 
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